Islam and Conventional Economic Systems - Essay Example

Islam and Conventional Economic Systems Islam and Conventional Economic System Introduction An Islamic economic system is one that relies on the principles and guidelines of the Al-Sunnah and Al-Quran. The system discourages gambling and usury. A conventional economic system is based on diverse economic standards of interests. The operational structure is flexible depending on various frameworks. This essay aims to explicate on the existent differences between Islamic and conventional economic systems. Furthermore, the paper presents a performance analysis of Islam and conventional banks during and after a financial crisis. Differences between Islam and Conventional Economic System There are diverse and notable differences between conventional and Islamic economic systems. Right to Ownership of Property The conventional system emerged from capitalistic and socialistic economic systems. The concept of the right to ownership of property differs in the two economic systems. Capitalism emphasizes on the right to own property. Particularly, capitalism is existent in the conventional economic system. The system advocates ownership of the systems of production and trading activities for private profits. It is not possible to claim ownership without the generation of profits. Private ownership of property is a contributor of personal wealth in the conventional economic system. This system through the ownership concept influences in widening the gap between the rich and the poor. The Islamic economic system brands ownership of property to God. Man exists with little powers from God to fulfill God’s purpose on earth. Contrary to conventional system, the Islamic system is based on the belief that God gives man the power as a trustee for the needy. They allow legal ownership of property on condition of sharing with the society. Sectors of production, distribution, and trade in this system are under public ownership. Customers under the Islamic system are entitled to public ownership of property (Hanif, 2014). Economic Freedom Under the conventional system, economic freedom is a dominant feature. Individuals do not meddle with the state in executing their freedom. The system allows the participation of individuals in the initiation and establishment of businesses, and professions. It allows for salary remunerations and free-will expenditure. Furthermore, it permits unrestricted economic freedom. The freedom, however, encourages exorbitant ways of generating cash such as illegal trafficking and gambling. It also encourages malpractices such as fraud, smuggling, and adulteration in business. The system allows for wealth competition and the necessity to realize high profits. Unlike the conventional system, the Islam economic system allows limited economic freedom to individuals to earn wealth. The system clearly differentiates between haram and halal as pertains wealth acquisition. Halal is an activity that is in line with the law while haram are activities forbidden under set regulations. The economic system forbids expenditure on luxurious lifestyles, spending extravagantly and consuming wealth. The system encourages the wealthy to spend on the poor and the needy as a good gesture. Competition Competition is an evident concept in the conventional economic system. It grants advantage to well-established business entities. At times, forces of completion overtake business entities that are not well established. Situations of unfair competition can encourage monopolization. Monopolies contribute to exploitative systems in which customers have limited choice. The absence of competition influences price inflation and may result to an increase in the level of unemployment. When unregulated, competition destabilizes production and consumption leading to possible recessions in the economy. The concept of competition in conventional systems, however, differs from that in the Islam economic systems. In Islam, the policies discourage unhealthy competition within the business premises. There are regulations in the Islam economic systems that put a ban on diverse factors that may promote competition. Such regulations discourage the emergence of monopolies in the market. According to the guidelines of Prophet Muhammad, individuals who monopolize are sinners. Furthermore, the Muslim system of the economy prohibits the monopolization of goods and services that are essential for the fulfilment of universal interests of the populace. Performance of Islam and Conventional Banks during and after the financial crisis Economists termed the financial crisis as the worst since the 1930s. The global financial crisis occurred between 2007 and 2008. The intensity of the impact of the condition on Islamic and Conventional Banks differed year after year. This is because of the difference in the systems of operation of the two banks. In a motive to determine the intensity of the effects of the financial crisis on the banks, economists performed a 4-year duration assessment on Conventional and Islamic banks. The cost to income ratio, capital adequacy ratio, and equity ratios of equity, total assets, and liquid assets were helpful in assessing the performance of the banks (Parashar, 2010). During the financial crisis Islamic banks performed well during financial crisis. Shafique, Faheem and Abdullah (2012), note that Islamic banks had fundamentally great level of flexibility during the crisis. The low level of competitiveness in the operations of Islamic banks caused notable financial stability. That is emphasized by a study by the IMF (2010) that revealed Islamic banks experienced stability in profitability levels compared to conventional banks during the crisis. Islamic banks operate within four basic principles. The principles include prohibition of interest transactions, sharing of risks, backing assets and ascertaining contracts for surety (Parashar, 2010). Islamic banks guaranteed rewards for commensurable risk transactions. Rewards were inexistent unless the transaction exposed the bank to risk. During the financial crisis, Islamic banks did not suffer inadequacy of capital compared to conventional banks (Hasan & Dridi, 2010). However, conventional banks did not perform well during the crisis. Conventional banks focused on interests in lending and fund mobilization (Parashar, 2010). Consequently, conventional banks experienced capital inadequacy during the global financial crisis. After The Financial Crisis Islamic banks performed well after the financial crisis. However, conventional banks performed poorly after the global financial crisis. After the crisis, more customers opted for transactions that exposed the Islamic bank to risk. This increased the profitability status of the bank. Business advanced after the crisis because of the presence of more cash to run the transactions. The charged interests signified the opportunity costs of the capital. After the financial crisis, conventional banks suffered in return on standard assets as well as liquidity Conclusion Conclusively, the Islamic economic system has numerous benefits on individual’s wellbeing in a society. The system supports public property ownership, advocates for safer freedom, and discourages monopolization to meet the needs of the populace equally. However, the system demands cooperation between governments and civilians for it to be effective. The conventional system of economics encourages unhealthy competition and uncouth methods of acquiring wealth such as smuggling. Generally, financial crises affect the profitability and growth of assets in banks. Despite the negative impacts of financial crises on Islamic banks, the banks delivers higher profitability, and are highly capitalized as compared to conventional banks. List of References Hanif, M. (2014). Differences and similarities in Islamic and conventional banking. International Journal of Business and Social Sciences, 2(2). Hasan, M. M., & Dridi, J. (2010). The effects of the global crisis on Islamic and conventional banks: A comparative study. IMF Working Papers, 1-46. International Monetary Fund. (IMF). (October 4, 2010). GLOBAL ECONOMIC CRISIS Islamic Banks: More Resilient to Crisis? IMF Survey online. IMFSurvey Magazine: IMF Research. Retrieved December 8, 2015 from http://www.imf.org/external/pubs/ft/survey/so/2010/res100410a.htm Parashar, S. P. (2010). How did Islamic banks do during global financial crisis? Banks and Bank systems, 5(4), 54-62. Parashar, S. P. (2010). How did Islamic banks do during global financial crisis?. Banks and Bank systems, 5(4), 54-62. Shafique, A., Faheem, M. A., & Abdullah, I. (2012). Impact of Global Financial Crises on the Islamic Banking System. Arabian Journal of Business and Management Review (OMAN Chapter, 1(9), 124-134. Read More